Standard setters discuss intangibles at IFASS meeting

  • IFASS (International Forum of Accounting Standard Setters) (dark green) Image

30 Sep 2020

The International Forum of Accounting Standard Setters (IFASS) is currently holding its fall meeting as a virtual conference. One presentation today saw a contribution by the standard setters of Canada, Germany, Japan, the United Kingdom and the United States on perspectives on the financial reporting on intangibles.

The five standard setters found that even among their group of five there were different perspectives on the accounting for intangibles - some seeing the difference between book value and market value of a company as a problem, some seeing the difference between book value and market value as a problem that can be solved by disclosures, some seeing no problem in the difference between book value and market value. The purpose of the presentation was to provide a balanced discussion of the alternative perspectives to support community-wide consideration of the issues and stimulate relevant academic research.

FASB Board member Christine Botosan presented the view of those that believe there is a problem, which needs resolving by additional recognition of intangibles. Her arguments included:

  • Failure to recognise important intangible items understates book value of equity and financial performance;
  • failure to recognise important intangible items reduces the relevance of financial statements;
  • recognition of some amount is better than no recognition:
    • Measurement challenges should not preclude recognition; and
    • verifiability concerns should not preclude recognition.

Ms Botosan also commented on measurement bases and their application to intangible assets. She differentiated between "in-exchange" assets that are used on a standalone basis and readily convertible to cash and "in-use" assets that are used in combination and not readily convertible to cash. Ms Botosan noted that most intangible items are "in-use" an that the relevant measurement basis should be historical cost or replacement cost. However, these costs are difficult to determine. Similarly, determining the fair value of intangible assets is difficult as intangible assets tend to be unique.

Kelly Khalilieh, Director of Accounting Standards at AcSB Canada, presented the view of those that believe there is no problem or not a problem that cannot be solved by additional disclosures. She noted that research shows that financial information is not declining in relevance and that it is not the objective of financial statements to show the market value of a company. Ms Khalilieh explored the benefits  of mandatory and voluntary disclosures. She noted that mandatory disclosures could be subject to audit and would be comparable and consistent. Voluntary disclosures would provide greater flexibility and would allow for more tailored disclosures. On possible disclosures she noted the following:

  • Disaggregated information on expenditures of intellectual capital (“future-orientated intangibles”),
  • an additional classification for “intangible activities” in the cash flow statement;
  • a statement of intangible assets or intellectual capital flows; and
  • an explanation in the notes of expenditures on intangible items.

Outside of financial statements she suggested to link intangible activities to the discussion of the organisational strategy and objectives and to supplement it with human capital metrics.

The paper of the five standard setters is currently under review at an academic accounting journal.

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